Mathematics of FinanceMCQMTP June 24 Series IIIQuestion 1596 of 512
All Questions

Assuming, that discount rate is 7%\displaystyle 7\% per annum, how much would you pay to receive Rs.50\displaystyle 50, growing at 5%\displaystyle 5\%, annually, forever.

Options

A2500\displaystyle 2500
B3000\displaystyle 3000
C3500\displaystyle 3500
D4000\displaystyle 4000
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Correct Answer

Option a2500\displaystyle 2500

All Options:

  • A2500\displaystyle 2500
  • B3000\displaystyle 3000
  • C3500\displaystyle 3500
  • D4000\displaystyle 4000

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Detailed Solution & Explanation

The present value (PV\displaystyle PV) of a growing perpetuity is: PV=ArgPV = \frac{A}{r - g} Given: * First cash flow (A\displaystyle A) = 50\displaystyle 50 * Discount rate (r\displaystyle r) = 7%\displaystyle 7\% p.a. = 0.07\displaystyle 0.07 * Growth rate (g\displaystyle g) = 5%\displaystyle 5\% p.a. = 0.05\displaystyle 0.05 Substituting the values: PV=500.070.05=500.02=2,500PV = \frac{50}{0.07 - 0.05} = \frac{50}{0.02} = 2,500 Hence, **Option A** is the correct answer.

About This Chapter: Mathematics of Finance

Paper

Paper 3: Quantitative Aptitude

Weightage

12-16 Marks

Key Topics

Simple & Compound Interest, Annuity, Perpetuity

The most important mathematical chapter in the entire syllabus. It covers Simple Interest (SI), Compound Interest (CI), Nominal vs Effective rates, Present and Future Value, Annuities (Ordinary and Due), Sinking Funds, and Perpetuities. The concepts learned here are applied heavily in CA Intermediate and Final.

View Official ICAI Syllabus

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